Why China Is Hungry for Brazilian Soy

Brazil's poor infrastructure has long hurt the competitiveness of its soybean exports, but the country's producers will benefit greatly as new rail and port projects come online in the Amazon region.

Problems for its main soybean export rivals, the United States and Argentina, will strengthen Brazil's trade relations with China this year.

Brazil's soybean exports to China will increase further because the South American country has an abundance of land suitable for producing soybeans with higher protein levels.

It's a long way from the southern reaches of the Brazilian Amazon to China, but it's a path that many more are set to tread. In the early 2000s, China didn't even figure among Brazil's top five export markets, but in every year since 2009, Beijing has been Brasilia's main trade partner. Today, China is a major market for Brazil's soybean exports, which account for over 40 percent of its total exports to the Asian country. And because of Beijing's trade spat with the United States and ambitious infrastructure investments in Brazil, Brazilian soybean exports to China are poised to keep growing.

Big Picture

Stratfor has been closely following the United States' trade spat with China, which will open opportunities for agricultural exporters such as Brazil to increase their share in the Chinese market. The country is likely to take maximum advantage of U.S. soybean producers' losses to export more of the crop to China.

A New Route to the Orient

China's demand for Brazilian soybeans has increased by almost 300 percent in the last eight years, according to official Chinese figures. Just last year, Brazil supplied over 53 percent of China's total soybean imports (excluding processed soybean meal or oil). The crop has been critical in padding Brazil's coffers; the country posted a $20 billion trade surplus with China last year, due in part to a 40 percent rise in soybean exports.

Even so, Brazil's poor infrastructure has severely hindered export growth for the crop. The traditional route to export soybeans to Asia has been rough and expensive, since more than half of Brazil's soybean production is located in the landlocked state of Mato Grosso. For the past five decades, trucks and trains have plied the same grueling, 2,080-kilometer (1,300-mile) route overland from the country's interior to its southern ports, where ships pick up the cargo and continue the journey. Brazilian producers must contend with transport costs that exceed those of their U.S. counterparts by close to 30 percent, though Brazilian soybeans cost roughly $1 less per metric ton in China than product from the United States. The difference lies in the fact that over 60 percent of Brazil's soybeans travel by truck, while the country's top competitors in soy — the United States and Argentina — rely mainly on rail and ship to transport their beans.

The construction of port terminals in Brazil's Amazon over the last five years will help the situation. Today, roughly 70 percent of Mato Grosso's grain exports transit through southern ports. But thanks to the new terminals, Brazil's soybean producers can avail themselves of a shorter and cheaper route to China. Last year alone, the amount of Brazilian soybean exports through the northern ports rose by 80 percent. Brazil's government also is planning to invite bids for a $4 billion, 1,120-kilometer railway to connect soybean-producing areas in Mato Grosso with the Tajapos River in the Amazon in preparation for an auction later this year. The tender already has attracted interest from foreign companies — including Chinese firms, according to the Shanghai Pengxin Group Co. chairman, who took a trip to Brazil last October. Other multinational grain companies, such as Cargill and Bunge, also have indicated their desire to help build the railway.

From the Tapajos River, ships transporting soybeans and other crops will enjoy easy access to the Atlantic Ocean and, subsequently, the Panama Canal. Grain farmers in Mato Grosso signed a memorandum of understanding with the Panama Canal Authority in March to increase their use of the waterway, whose authorities have welcomed the prospect of more Brazilian agricultural exports passing through its locks. The increased use of northern ports in the Amazon and the Panama Canal will save Brazilian soybean exporters roughly five days in transportation time to China, while also avoiding road congestion on the routes to southern ports. In addition, better infrastructure will help grain producers gain cheaper access to goods such as fertilizers, thereby further reducing production costs.

All in all, improved infrastructure will enable Brazil, which overtook the United States as China's main soybean supplier in 2013, to keep boosting its exports of the product. The South American country is expected to send 56 million metric tons of soybeans to China this year, up from Brazil 50 million metric tons in 2017, according to Chinese customs officials.

Rivals' Losses Are Brazil's Gain

And infrastructure isn't the only factor that will help Brazilian farmers sell their product to China. Argentina has been suffering from a severe drought that will reduce its soybean production by almost 20 percent this year. The prospective harm to soybeans has led Buenos Aires to revise this year's economic growth downward; the product, after all, represents around 30 percent of Argentina's total exports.

Perhaps the biggest boon to Brazil's soybean producers, however, is the escalating trade spat between the United States and China. In response to U.S. President Donald Trump's initial sanctions against Beijing, China announced plans April 4 to impose a 25 percent import tariff on U.S. soybeans. The development presents Brazilian soybean producers a significant advantage over their U.S. counterparts in the Chinese market. (Three months earlier, Beijing imposed stricter import standards on U.S. soybeans, and Brazil's soybean exports to China surged by 720 percent in January year-over-year.) Though Brazil cannot replace U.S. soybean exports to China, which exceed 30 million metric tons a year, the prospective new tariffs will enable it to benefit from premium prices and to increase the volume of its exports to the Asian country.

A Recipe for Lasting Success

But while Argentina's drought and the U.S.-Chinese trade spat are temporary variables. Two other factors, beyond infrastructure development, are likely to guarantee the success of Brazilian soybeans for years to come: quality and abundant land for cultivation. Because of warm growing conditions, Brazil's soybeans contain an average protein level of 37 percent — 3 percent more than U.S. soybeans — making them more attractive to the many consumers who purchase the product for animal feed. Brasilia also has authorized the sale of 4 million hectares of land in the northern state of Roraima, which is suitable for soybean and corn production. If growers use all this land for soybean cultivation, Brazil could grow around 13 million metric tons of additional soybeans each year. Soybean production has been rising in the southern portion of Para state in the Amazon, too, but legal hurdles and opposition from environmentalists will pose a major impediment to soy production there.

Brazil's agricultural exports to China have played a critical role in strengthening trade ties between both countries over the last decade. Brazilian soybean growers have made major inroads in the Chinese market today — in part because of their foreign competitors' misfortune. But even if the problems affecting the United States and Argentina are temporary, Brazilian soybean exporters are poised to protect their advantage going forward. Thanks to abundant land, high soybean protein levels and better infrastructure, the Chinese soybean market is Brazil's to lose.